Can You Roll Closing Costs Into Your Mortgage?

What Are Closing Costs?

Closing costs, also known as settlement fees, are the fees you pay to finalize a home purchase. They cover a wide range of expenses you'll encounter at closing, such as:

• Points and lender origination fees
• Appraisal, title and taxes
• Home inspection fees
• Real estate agent fees
• Title search and insurance
• Prepaid interest, property taxes and mortgage insurance
• Homeowners insurance
• Escrow accounts
• Recording fees

Be aware: Closing costs are typically due when you sign your papers at closing. Some fees, like the home inspection fee, may be charged at the time of service.

How Much Will You Pay in Closing Costs?

Typically, closing costs range from 2% to 5% of the home's purchase price. The amount you'll ultimately pay can vary depending on several factors, including your loan type, down payment, where you live and whether you purchase points to bring down your interest rate.

Example: On a $500,000 home, closing costs could range from $10,000 and $25,000 based on a typical range of 2% to 5%.

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Can You Roll Closing Costs Into Your Mortgage?

Yes, you can often roll closing costs into your mortgage if your lender allows for it and you meet the loan's requirements. If so, you may opt to add in the closing costs to your loan balance rather than paying them out of pocket at closing.

Be aware, however, that your loan balance will be higher and you'll pay interest on that added balance. While rolling in closing costs is a convenient option that can help make homeownership a possibility if you're short on funds, it also makes those costs more expensive in the long run.

Not every closing cost can be rolled into your home loan.

Closing Costs You May Be Able to Roll Into Your Mortgage

Here are closing costs you can often finance into the loan:

• Loan origination fee: The lender charges this fee to process and underwrite the loan. It may also include application and processing fees.
• Appraisal fee: You'll pay to have the property professionally valued before you buy it, which typically costs $300 to $1,000.
• Home inspection fee: Most buyers pay $250 to $700 to have a professional inspector evaluate the home's condition and make sure it meets local building standards and is suitable for sale.
• Credit report fee: This is the cost your lender charges you for pulling your credit.
• Title fees and title insurance: Fees for the title search and insurance policies protect you and the lender against ownership disputes.
• Attorney fees: These are any legal costs incurred while buying the home.
• Mortgage insurance premiums: If your loan requires mortgage insurance, ask your lender whether its closing cost can be rolled into your loan. For some loan types, including FHA loans, an upfront premium is due at closing and can typically be financed into the loan balance.
• Recording fees: This cost covers the official recording of your new deed and mortgage with your local government. It usually costs around $125.
• Discount points: Buying mortgage points can lower your interest rate and reduce your monthly mortgage payments. One point equals 1% of the loan amount; that amounts to $1,000 for every $100,000 you borrow.

Tip: Before buying discount points, use a mortgage calculator to see how doing so could impact your interest rate, closing costs and loan payment.

You won't be able to roll every expense into the home loan (and you probably shouldn't). Most ineligible costs fall under "prepaids," which cover homeowner costs that aren't due until after you close.

Closing Costs You May Not Be Able to Roll Into Your Mortgage

Fees you typically can't roll into your mortgage include:

• Property taxes: Your lender will collect several months of prepaid taxes upfront to get your escrow account going.
• Homeowners insurance: Typically, lenders want a full year's premium paid upfront at closing.
• Homeowners association (HOA) fees: If your neighborhood has an HOA, you'll have to cover any required HOA fees owed at or before closing.
• Prepaid mortgage interest: This is the interest that accrues between your closing date and your first payment due date.
• Escrow fees: These are funds collected upfront to establish your escrow account for future disbursements.

Pros and Cons of Rolling Closing Costs Into Your Mortgage

Rolling closing costs into your mortgage can ease the financial burden at the closing table, but a higher loan balance will cost you more over the life of the loan. Here's a closer look at the benefits and downsides.

Should I Roll Closing Costs Into My Mortgage?

Rolling closing costs into your mortgage is worth considering if you're short on cash but can comfortably handle the slightly higher monthly payment. It can also make sense if you prefer to keep your savings liquid after you close more than keeping your loan balance lower. For example, if you'd rather have an emergency fund in place than to start living in the home with nothing in the bank, then rolling closing costs could be a good option.

But, if you can pay closing costs upfront without wiping out your savings, that's likely a better move. You'll start with a lower loan balance and build equity faster. Even better, you could avoid paying interest on those costs over the life of your loan. The monthly savings may seem small, but it adds up over a 15- or 30-year loan term.

Tip: When deciding whether to roll closing costs into your mortgage, understand going in that you'll pay more over the life of the loan. Ask your lender to show you the difference in total cost both ways before you decide.

How to Roll Closing Costs Into Your Mortgage

The process to fold closing costs into your home loan is fairly simple, but it does require you to be proactive and pay attention to details.

• Talk to your lender first. Requirements can vary by lender, and some don't allow closing costs to be rolled in at all. Confirm it's an option and find out if you qualify before you start planning on it.
• Run the numbers. Calculate how rolling your closing costs into your loan will affect your loan. Remember, rolling costs will change your balance, monthly payment, LTV ratio and DTI, which could impact your loan's annual percentage rate (APR).
• Ask about lender credits. While you're at it, ask your lender if they'll cover closing costs in exchange for a slightly higher interest rate. Some lenders offer this option, and it's worth comparing that option to rolling costs into the loan. Depending on the rate difference, it could even result in a lower monthly payment.
• Get approved for the higher loan amount. If you agree to the updated terms of your loan after adding in closing costs, the next step is for your lender to approve the loan. As with any loan, you may need to submit additional supporting documents to confirm you still meet the loan's LTV and DTI requirements.
• Review your closing disclosure carefully. You'll receive your closing disclosure at least three business days before closing. Check it closely to confirm your final loan amount, monthly payment and all rolled-in costs match what you agreed to.

Frequently Asked Questions

Stronger Credit Could Result in a Better Mortgage Interest Rate

Rolling closing costs into your mortgage is a viable option when cash is tight, and it can be the right move depending on your situation. But, be aware you'll have a higher loan balance, a slightly higher monthly payment and you'll pay more in interest over time. From a pure dollars-and-cents standpoint, paying upfront costs you less in the long run. If that's not possible, rolling them into your mortgage could be an option that makes homeownership possible right now.

Before you apply, it helps to know where your credit stands. A stronger credit profile could help you secure better loan terms and lower costs overall. Check your credit report and FICO^® Score^Θfor free with Experian to see exactly what lenders will see when you apply.